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Comment by ChadNauseam | Hacker News Reader

I'm no bitcoin defender, but that's not really how inflation works. Inflation is not just an increase in the base money supply. For example, a supply chain crisis can cause inflation without the money supply changing at all. And central banks can control inflation by controlling lending without printing or destroying money. Lending creates "virtual money" that contributes to inflation, so one of the ways central banks control inflation is by increasing or decreasing interest rates.

Bitcoin makes these things much more difficult, of course, and would never be a good currency compared to what we have now. But the gold standard has almost exactly the same properties as bitcoin, and gold-backed currency worked okay in the US for a long time.

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The gold-backed currency did not, in fact, work okay in the US for a long time. Between 1836 and the Great Depression, the economy went 3 or more years between recessions only 4 times. By comparison, the last three gaps between recessions were 7, 10, and 6 years; and it's now been 13 years since the last one.

[1] https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit...

Come on. The 1800s „recessions“ were minuscule at worst compared to today‘s global meltdowns happening every decade. Think about the Asian crisis of the 1990s, the New Economy bubble burst at the beginning of the 2000s, the sub prime crisis 12 years ago and now a post Covid recession.

Also you‘re taking one feature „they had a gold standard back then“ and take it as the single point failure. In reality having a „Gold Standard“ does not guarantee a non-inflating currency. In the 1920s the FED was printing more dollars than were backed by gold to pay back the government’s war time debts. The same happened in the losing nations like e.g. Germany, too, in a much greater force causing a death spiral completely destroying the German Reichsmark. In the US you were lucky to just experience a stock market boom that spectacularly burst in 1929. This would have caused a recession for sure. However, the decade long depression that actually followed was a result of unprecedented economic meddling by the federal government under Hoover and then Roosevelt.

The Gold Standard was removed after the „Bretton-Woods“ system broke down in 1971. That was an attempt at establishing an international currency system with fixed exchange rates. It worked in a pyramidal fashion: The US promised to have their Dollars backed by gold and the middle power nations‘ central banks backed their currencies with US dollars. Of course, the US printed more dollars than they actually could back by their gold reserves. At some point France demanded to redeem their dollar reserves in Gold. The US did not comply and in 1971 Nixon declared the Dollar not being redeemable into Gold any more because the FED didn’t have enough gold left. Since then the US dollar as well as all international currencies are backed only by the people’s trust in them and by the fact you have to pay your taxes in those currencies.

So you see the monetary history is primarily a history of failure induced by bad economic policies. How currencies were implemented is just of secondary interest.

Bitcoin could easily serve as an international currency compared to the US dollar. Its value is based on trust like the US dollar. Governments could collect their taxes in the form of bitcoin if their wanted to without a major systemic change. And unlike the Dollar or Euro, Bitcoin couldn’t be inflated. Whether that will happen and change economy for the better is still left to be seen.

>Come on. The 1800s „recessions“ were minuscule at worst compared to today‘s global meltdowns happening every decade. Think about the Asian crisis of the 1990s, the New Economy bubble burst at the beginning of the 2000s, the sub prime crisis 12 years ago and now a post Covid recession.

This is completely wrong. The crash of 1873 began what historians call a 20-year depression. The Panic of 1893 was so serious that when Grover Cleveland needed oral surgery for cancer it was done in secret to avoid further panicking the country. J. P. Morgan basically bailed out the entire US economy in the Panic of 1907.

In all of these cases, labor unrest from the unemployed far exceeded anything seen in any post-WW2 economic crisis in the US. At multiple times the US treasury faced the prospect of being unable to fully redeem demands for gold in exchange for paper money. For the entirety of the Gilded Age, the two main political issues in the US were protectionism and free silver, both fundamentally tied into how the US economy functioned and how the US government paid for itself.

> J. P. Morgan basically bailed out the entire US economy in the Panic of 1907.

That says more about the size of the US economy at that time than about the size of the economic crisis…

Are you honestly comparing the Asian crisis with what happened in the US 120 years ago?

> This is completely wrong. The crash of 1873 began what historians call a 20-year depression.

Well, just a couple of years earlier the US was in the middle of a bloody civil war that was financed with monetary inflation. That is to blame the post war depression. Not the Gold Standard per se.

You are also conviently evading my main argument that the „Gold Standard“ is irrelevant to the discussion about Bitcoins inherent design. Bitcoin does not implement a Gold Standard even if it is called „digital gold“. It is a machinery designed to prevent human meddling with a monetary base. Something that the Gold Standard was better than today‘s fiat money. But of course it was still far from perfect and depended on the honesty of politicians and bankers.

So — forget about the Gold Standard. It will never come back. The promise of Bitcoin is to bring a monetary system politicians and bankers cannot manipulate. Whether that’s a good thing or even realistic is a separate discussion.

> The promise of Bitcoin is to bring a monetary system politicians and bankers cannot manipulate. Whether that’s a good thing or even realistic is a separate discussion.

Never heard of any politician giving up power voluntarely.

And money is the power: no more printing - need to work hard for money.

Not gonna happen.

Actually not true. A lot of the 19th century recessions were "global" in that there was contagion across the Atlantic to Europe (or vice versa). Asia didn't get linked into the network until the end of the 19th century.

And the US money supply in the 1920´s was pretty stable as it happens, the 1929 bubble was a lending phenomena.

> The 1800s „recessions“ were minuscule at worst compared to today‘s global meltdowns happening every decade.

One of those recessions (the panic of 1857) was one of the main contributing factors to the American Civil War breaking out, which hardly seems ‘minuscule’.

Are you thinking that the South would have willingly given up slavery or that the North wouldn't have pushed the issue if this recession hadn't happened? Would we still have slavery in the South today, or would the war just happen some years later?

The North was willing to leave slavery in the hands of the States. Maybe without the pressure of a reccession the South would have accepted that compromise, and we had seen a quite different story of the USA until today.

Wasn't slavery already outlawed in the Northern states? I thought one of the main points of tension was the refusal of Northern states to recognize slaves that fled to the North as "property" and "return them to their owners".

Yes, in other words

> The North was willing to leave slavery in the hands of the States.

The South was unwilling to accept that the North didn't recognise slavery in its territory.

Southerners wanted slavery to be recognised and enforced throughout the US.

> I thought one of the main points of tension was the refusal of Northern states to recognize slaves that fled to the North as "property" and "return them to their owners".

That was the official line — and rather obviously against the concept of states' rights.

But for my money the main issue for the "gentlefolks" was that they couldn't bear not being waited on hand and foot by their slave retinues while enjoying the trapping of the north: they had to pick between those trappings and having an enslaved retinue, as any slave they brought up north was a jump and skip away from freedom.

And they really couldn't handle the "inconvenience" and "degradation".

It was easier, more or less, to buy a house in great depression for average person than it is now.

this kind of assumes that the only goal of an economy is to avoid recessions. growth is also very important to the average person, and the gold standard does not optimize for that

The goal of an economie should also be stability of the system. So that people can have a good baseline for living

Why is economic stability more important than higher economic prosperity?

How does this sound:

Optimizing for ever higher economic prosperity has so far had the side-effect of ever higher economic inequality, in no small part because only a small number of people are able to succesfully get rich off of moments of instablity.

Optimising for stability means less homless people on the streets (which is an appaling situation in US which still despite that wants to call itself a first world country) because a larger part of society can plan their futures and actually have those plans come true. This also necessary includes socialised healthcare and schooling, for the same reasons (which again probably won't happen in the US for the forseeable future).

Recession means absence of economic growth.

That’s because the banks issued more gold certificates than they had reserves. Those bank shenanigans were the origin story of fractional reserve banking.

Lol we are constantly living in recession in case you failed to notice. Its just protracted.

To clarify, the word "recession" has a strongly defined meaning. It does not mean "things are bad" although bad times are strongly associated with recessions. Things can seem bad even without a recession.

Historically speaking, each time we climb out of a recession over the last 50 years it's been a bit slower of a climb than the previous climb out. That is a worrisome trend in its own right. I believe that's the kind of bad you feel people are experiencing -- a barely perceptible improvement starting from a bad situation.

> Inflation is not just an increase in the base money supply.

Actually it can. During WWII, Germany was trying to make enough counterfeits and launder it to destabilize the allied powers' currencies. Many third world countries ended up remaining poor because their political leaders printed as much money as they wanted.

> But the gold standard has almost exactly the same properties as bitcoin, and gold-backed currency worked okay in the US for a long time.

God only filed some of the gold under the ground in the USA. He filed the rest of it elsewhere. The currency would then be based upon how much gold was mined and third parties could potentially be in control of the US currency.

As one freshwater economists argued: "Why gold? Why not french bordeaux?"

> As one freshwater economists argued: "Why gold? Why not french bordeaux?"

Because people have loved gold for thousands of years.

And they haven't loved wine?

https://www.bbc.com/news/world-europe-41977709

No, maybe the people in West not the east, the love for gold is universal.

> And central banks can control inflation by controlling lending without printing or destroying money.

Lending is printing and destroying money. Central banks cannot control lending by changing interest rates as we have seen since the GFC. They couldn't get inflation up for ten years, and now they can't keep it down.

The belief in central banks and gold (why are gold miners so special?) is just as much of a cult as cryptocurrency.

All prices are relative, that's why they move all over the place.

> Lending is printing and destroying money. Central banks cannot control lending by changing interest rates as we have seen since the GFC. They couldn't get inflation up for ten years, and now they can't keep it down.

I beg to differ, asset prices experienced massive inflation during that period. Obviously, nobody was borrowing money to buy loads of hamburgers or other things that greatly influence the CPI. That demand is mostly inelastic and asset prices have little influence on it. That said, government spending accounts for almost half of spending in total. If this is increasingly financed by (the equivalent of) debt monetization, you will see debt chasing the hamburgers as well, causing runaway inflation like in Turkey. The central banks are very much in control of that not happening.

"I beg to differ, asset prices experienced massive inflation during that period."

Massive inflation, or just a return to their free market value.

Setting interest rates is an artificial market intervention. In a free market the base cost of money is zero, since it can be produced on demand at the push of a button.

The private price of money is then determined correctly by market action based upon credit risk and/or exchange risk.

Lending is often talked about as "printing money" but isn't investing in anything other than money also able to do the same thing?

Some seed investor puts a million pieces of money into a company, that company starts getting a lot of customers, new people are willing to pay much more for pieces of that company. But now this company has gone from zero to lots of value, and so that first investor can behave like they now have a billion pieces of money instead of the million they had originally (whether that's cashing out a small amount, or borrowing against it). So if the economy grows in a non-zero-sum way, how do you avoid inflation? The total value in the system (due to the circulation of money and the productive activity) goes up, and lots of it isn't in the form of "pieces of currency."

Is there so much difference between "lending money" - giving money on the belief that the counterparty will pay you back more over time - and "investing" - giving money on the belief that the share of the thing will be worth more over time? In the absence of regulations, even someone like a bank who's holding other people's deposits could do either sort of investment (and so is VC just a special sort of "bank")?

The way I think of it is that when you make a purchase, the money just basically switches bank accounts. The money is still in the banks, and currency is not created or destroyed, just exchanged between players.

When a bank makes a loan using it's customer's money, the balance in the account doesn't disappear -- and the money is still available to the customers. But now a loan for a car financed by a bank goes into the car dealer's bank account which then gets loaned out by that bank. This happens over and over again in a recursive manner. This is the Monetary Multiplier Effect as part of Fractional Reserve Banking.

It's basically kind of a regulated shell game. The bank has to have so much in cash to pay out in case of a bank run, and the FDIC protects customers from bad bank management. But your money is literally replaced with a number in an account balance. And your $10k in the bank might generate $40k of loans in the economy based upon your deposit.

An investment however removes cash from your account and replaces it with shares and that money is given to someone else. So it's an exchange of money and an exchange of shares. And thereby doesn't have the same multiplication effect. In this case value is created or lost which makes your shares worth more or less on the market.

Again, value doesn't create money. Money is exchanged between parties for different amounts. A 1981 bordeaux doesn't create currency over time, just increases it's value.

Fractional reserve banking directly inflates the economy via loans. If I deposit $1000 into my bank account, the bank will lend it to someone else instead of just holding it for me. That loan is new money created out of literally nowhere. It only becomes real money when the borrower actually extracts value from this world and earns real dollars in the process. The loan's repayment makes it real. Until that happens, the money doesn't actually exist, it's completely made up.

So borrower goes out and buys the stuff they need to make it happen. That money eventually ends up right back in the bank as a deposit. Once at the bank, it is once again loaned, spent, deposited, loaned, spent, deposited... Quickly inflating $1000 into a whole economic system worth huge figures like $100,000, not one cent of it real until all of the aforementioned economic activity actually succeeds in generating some real value. Always at risk of the whole stack unwinding due to business failures leading to defaults on loans which could cause even more defaults and liquidations and foreclosures and losses and all sorts of problems.

Multiplying that by an entire country's polulation results in truly mind-boggling amounts of money generation and therefore inflation. The actual money supply doesn't actually matter since it's a small fraction of the amount of money that's actually circulating.

The funniest part is cryptocurrency exchanges have turned into banks. They offer bitcoin lending services, savings accounts. Finite bitcoin supply? It doesn't matter. Value can always be inflated away through loans.

I’m not really following this. Let’s say I secretly tag my dollars with a red mark. Deposit $1000 cash, and then my account shows a $1000 balance. My red $1000 is probably going to wind up being withdrawn in an ATM by someone else, or used in a mortgage, or something else, but my red tagged $1000 bills don’t suddenly become a multiplied amount of money!

That is what the average person thinks what happens but in reality the bank does not even care about your deposit. What actually happens is that the bank just creates a new money from thin air by just adding another zero their account and then transferring some of that new money to the person who wants a loan.

The US fed does this too, they add a zero at the end of the existing account and create more money. Its all in a database no cash is being printed.

So you’re telling me that banks routinely scam the ACH system? Pretty sure this is 100% FUD.

Why do you think its FUD, what do you mean scam the ACH system?

You deposit $1000. The bank does the following accounting:

  accounts["thehappypm"] += 1000
  accounts["reserves"] += 1000

Then I go to the bank and request a $900 loan. It knows it has $1000 lying around doing nothing useful so it just gives a fraction of it to me as a loan. The bank does the following:

  accounts["reserves"] -= 900
  accounts["matheusmoreira"] += 900

So now we have three accounts:

  accounts["thehappypm"] == 1000
  accounts["matheusmoreira"] == 900
  accounts["reserves"] == 100

So the bank received a $1000 deposit, kept a $100 reserve and loaned out $900.

That $900 is completely made up money. They just credited my account with that amount out of nowhere. I'm supposed to go out there and earn money to pay it back. If I do, all is well. If I default? The bank has its books showing they owe you $1000 but they only have $100 in reserve. The illusion is shattered the second you attempt to withdraw that money.

In the real world, it's not just you and me. It's banks leveraging their massive reserves on risky loans and investments that fail, thousands of customers noticing and attempting to withdraw everything they have all at the same time, getting nothing, leading them to default on their debts and so on and so on until the government literally manufactures even more money to bail out the banks by "injecting liquidity" into them and restoring their reserves, putting an end to the bank run at the cost of even more inflation.

So I decide to spend that $900 on a computer for software development in order to work remotely. I go to the store and buy one.

  accounts["matheusmoreira"] -= 900
  accounts["store"] += 900
  accounts["reserves"] += 900

  accounts["thehappypm"] == 1000
  accounts["matheusmoreira"] == 0
  accounts["store"] == 900
  accounts["reserves"] == 1000

The bank just received a $900 deposit, so its original reserves are restored. This means another loan is possible! This cycle repeats itself many times as money circulates until millions have been created out of thin air. Notice that the only way those accounts balance is if I pay back my $900 loan. If I lose my job before that happens? They won't balance and the bank will have to pick and choose who can withdraw and how much.

Not too long ago, Binance had restrictions on bitcoin withdrawals. Unverified accounts could only withdraw a small amount per day, verified accounts could withdraw a larger but still limited sum. Hmm...

I still don’t see the problem. At no point is cash conservation broken. They may say that my account has $900 in it when that cash doesn’t exist, it’s been used for some other end, but that’s not weird or unusual, or even interesting. I know that the bank has plenty of other peoples’ $900 that if I wanted that cash I could take it.

> I still don’t see the problem.

The problem is banks operate in a state of perpetual insolvency. Their ability to pay off their debts to customers depends on the state of the larger economy. Too many defaults and the whole thing comes crashing down.

> At no point is cash conservation broken.

It never existed to begin with. All that's required for the illusion to disappear is for enough people to attempt to withdraw funds at the same time.

> I know that the bank has plenty of other peoples’ $900 that if I wanted that cash I could take it.

The bank has money until it doesn't.

https://en.wikipedia.org/wiki/Bank_run

> Many of the recessions in the United States were caused by banking panics

> The Great Depression contained several banking crises consisting of runs on multiple banks

> The global financial crisis that began in 2007 was centered around market-liquidity failures that were comparable to a bank run

https://en.wikipedia.org/wiki/Financial_crisis_of_2007–2008

> The International Monetary Fund estimated that large U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans

> Lack of investor confidence in bank solvency and declines in credit availability led to plummeting stock and commodity prices

> The crisis rapidly spread into a global economic shock, resulting in several bank failures

> The de-leveraging of financial institutions, as assets were sold to pay back obligations that could not be refinanced in frozen credit markets, further accelerated the solvency crisis

> governments and central banks provided then-unprecedented trillions of dollars in bailouts and stimulus, including expansive fiscal policy and monetary policy to offset the decline in consumption and lending capacity, avoid a further collapse, encourage lending, restore faith in the integral commercial paper markets, avoid the risk of a deflationary spiral, and provide banks with enough funds to allow customers to make withdrawals

People complain about Tether but the whole banking system is just Tether on steroids.

> People complain about Tether but the whole banking system is just Tether on steroids.

With regulation, and audits, and insurance, and government guarantees that if something goes really wrong you will be made whole (as long as you don't deposit more than 7 years the median US income).

I also wouldn't deposit my money in an 1890's US bank.

You’re just repeating the same thing over and over. I still don’t think at any point the bank is multiplying money in any kind of real or concerning way.

You should really read up on this. He explains it fairly well, and yes, money are multiplied with fractional reserve banking. Since the bank only needs to keep a fraction of the money they owe to account holders, they can loan the rest out. But the point is that this loaned money ends up on some other customers bank account, possibly with the same bank, and can thus be loaned out again. So in a 20% reserve requirement situation, _the same money_ can be used to finance the building of five houses, not just one which it would be if the reserve requirement was 100%.

Banks duplicate your money endlessly. After money that existed only in your possession is deposited at a bank, it will exist in many places simultaneously: in your account, in other people's accounts, as loans to third parties. If you don't see how that inflates the money supply, then I'm not sure what else I can say.

This is what fuels exponential growth of nations. Banks keep conjuring up money out of thin air and loaning out to people so they can work and extract value out of this planet at unsustainable exponential rates. Humanity is addicted to it. The second these loans become unavailable for any reason, everything comes crashing down. The economy literally grinds to a halt.

Worst of all is these banks essentially dictate the direction future society will take. They choose who receives loans and who's left out in the cold. People like Larry Fink, CEO of BlackRock and manager of 10 trillion dollars. They decide things and then say "will you lead, or will you be led?"

Perhaps you're getting hung up over physical bank notes. If most people and companies hold most of their money as numbers in bank accounts and do most of their buying and selling by moving numbers between bank accounts, why is it only cash that matters?

The money is the numbers the banks report to you. Multiplying those numbers is inflating the money supply. Yes they might be required to hold some other assets than simply numbers in their databases to start the whole process, but they can still multiply money to some degree.

> It knows it has $1000 lying around doing nothing useful so it just gives a fraction of it to me as a loan. The bank does the following:

The bank does not have to do this everytime, Most of times it just creates a loan account and adds a number in the database and creates money out of thin air.

Fractional reserve banking doesn't exist [0].

The Bank of England explained this in 2014. Surely the myth should have died by now.

[0]: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...

https://en.wikipedia.org/wiki/Fractional-reserve_banking

> Fractional-reserve banking is the system of banking operating in almost all countries worldwide

> under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserve, and are at liberty to lend the remainder to borrowers

I quote the Bank of England, and you quote Wikipedia in response.

Why not read the BoE report, and respond to that?

> Lending creates "virtual money" that contributes to inflation, so one of the ways central banks control inflation is by increasing or decreasing interest rates.

One way to understand how this works is by visualizing the circulation of the monetary base, aka physical coins and central bank reserves, or bitcoins/lunas in the crypto case.

Without lending, you have people and companies entering transactions, accumulating money and saving them for a later investment, for example putting a penny in the mattress or a bitcoin in cold storage. The penny might physically change hands once or twice a year. So in agregate you have:

V = PQ/M

with V, velocity of money ( = 1 transaction per year), PQ is the gross product (price level * quantity of goods), and M is the money supply (say, 21 milion bitcoins).

So one way to generate inflation is to increase M (print more money), since the ability of the economy to produce goods changes slowly, so P will need to increase to maintain equilibrium.

But another way to do that is to promote lending: instead of placing the penny in the mattress, is is deposited to a bank who immediately places it in the hands of a lender who buys a house or a TV, giving it to another entity that deposits into a bank etc. So you have a physical penny on steroids that can travel with a much higher velocity in the economic system, say 8 transactions per year as it was typical for the dollar last time I estimated this.

Banks can effectively print unlimited money substitutes (deposits denominated in bitcoins, luna, pennies etc) and as long as depositors trust them to be solvent this entire virtual monetary base will participate in the MV=PQ equation.

This is true in a fiat world as well as in a Bitcoin world, unregulated banks can greatly amplify the velocity of bitcoins without any technical support from the currency itself, in effect putting significantly more bitcoins on the market available for transactions, so overall reducing their market value, or "creating inflation" without printing a single bitcoin.

Can the traditional inflation control measures such as increasing/decreasing lending rates continue to work with skyrocketing income-inequality?

While the Nobel laureates keep stressing about wealth inequality, I don't see media-economists even mention inequality as a factor.

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